Subsidies,new entitlements paint gloomy fisc outlook

PMEAC recommends slashing and phasing out of subsidies by deregulating diesel prices.

Written by ENS Economic Bureau | New Delhi | Published: February 23, 2012 12:40 am

The Prime Minister’s Economic Advisory Council paints quite a gloomy picture of the country’s fisc,especially with new entitlements kicking in during 2012-13 on account of the Food Security Bill and Rashtriya Madhyamik Shiksha Abhiyan.

While it is sure the government will breach the fiscal deficit target this year,it seems to be equally certain that the additional spending commitments will render it impossible to meet the 4.1 per cent of GDP target for 2012-13. This target was set out in the medium-term fiscal policy statement of this year’s Budget.

“The fiscal situation is a cause of serious concern. Since 2007-08,there has been a steady deterioration in the situation and at present,it is not very different from the precarious position that existed in 2001-02. It is also important to note that the problem is not structural and needs to be remedied without much loss of time,” it said.

Clearly,the single-most important message that the Council has for the government is to get its act together and rein in the fisc over the medium term. It has strongly recommended slashing and phasing out of subsidies by deregulating diesel prices and decontrolling urea prices.

Subsidies combined with extra spending on food,health and education can force the government to borrow more and have a negative fallout on the financing needs of the private sector. For instance,universalising healthcare,as recommended by a Plan panel committee,itself will entail extra spending of at least one percentage point of GDP in the medium term.

“The medium term challenges are formidable. The Thirteenth Finance Commission has set the target of containing the fiscal deficit at 3 per cent of GDP for the Central government by 2014-15 and that would require compressing the fiscal deficit by about 2.5 percentage points over the next three years,” the EAC said in its review of the economy.

According to the council,the consolidated deficit of the Centre and states at 5.4 per cent of GDP by 2014-15 and making additional provision for public spending on education,healthcare and food security would require an adjustment of almost 5 to 6 percentage points of GDP in the next three years which is a formidable task.

“In fact,the Twelfth Plan has to be formulated in this constrained fiscal environment and it poses serious difficulties in making adequate allocation to the much needed physical infrastructure. Achieving the targeted level of fiscal adjustment without compressing expenditures on much needed infrastructure,will require significant increase in revenues and phasing out subsidies and transfers,” it said.

Uphill task

* PMEAC recommends slashing and phasing out of subsidies by deregulating diesel prices and decontrolling urea prices

* Consolidated deficit of Centre and states at 5.4% of GDP by 2014-15 and making additional provision for public spending on education,healthcare and food security would require an adjustment of almost 5 to 6 percentage points of GDP in the next three years

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